Not all policies are created equal

This morning, you received a phone call from a potential client interested in purchasing professional liability coverage. During the course of the conversation, the prospective client is not a traditional professional, such as an attorney, a physician, an architect/engineer or an accountant. Rather, he is a consultant in a unique subject area and is not required to be licensed to “practice” or offer his services. A miscellaneous professional liability application gets completed and sent out to various markets, along with all pertinent attachments, for terms. You’re now about to put together a proposal for your client, who will most likely have questions about the policy or policies he is about to purchase. Most, if not all, MPL policies are written on a claims made or claims made and reported basis, and most of the policies include such “warning” right at the top of the form.

Assume that the prospective client’s services do not fit the standard, admitted market, perhaps due to claims, scope of services, capacity, unique wording, new venture status, etc. Consequently, you must deal with a surplus lines wholesaler. The first item you need to be concerned with is to make sure you receive copies of the specimen form being quoted, as well as copies of all applicable endorsements and exclusions. I remember the days when the forms, endorsements and exclusions were only available via facsimile or mail. Today, anything can be attached to an e-mail and transmitted in seconds, producing a nice, legible, clean copy, or the forms can be downloaded from a Web site in seconds. So accept no excuse for not furnishing you with all the forms.

Bear in mind that not all miscellaneous professional liability policies have the same provisions, and the wording may differ tremendously from one form to the next — you will not deal with standard ISO forms. You will need copies of the forms for your review and discussion with your client. After all, you wouldn’t purchase a new car without test-driving it first or purchase a home without first taking a tour, would you?

So what will the client be covered for? Professional liability policies are intended to afford protection against liability for economic loss, and MPL policies are no exception. The key in this area is the definition of professional services being covered, which in the case of a miscellaneous form, is customized and typically shown on the declarations page of the policy, normally followed by “for others for a fee.” The carrier then will customize the MPL form by adding amendatory endorsements, some of them on manuscript forms, by deleting or amending exclusions, or both.

For example, to cover an expert witness, you would like to offer personal injury coverage. The form may have a specific PI exclusion that will need to be deleted or amended. You may need to find a carrier that will be willing to do so.

It is also important to determine where the professional services will be rendered to address the coverage territory wording accordingly.

Most policies include “defense costs” within the limit of liability, although defense costs outside” seem to be coming back. It is very important that the insured understands that the policy limits will be depleted by defense costs and that it is possible to end up without any dollars for indemnity after a long, costly litigation battle.

While on that area, take a look at the defense and settlement wording on the policy. That is where you will find whether the policy is “duty to defend” — more favorable to the insured — and whether the insured will have a voice when it comes to settling a claim and appointing defense counsel, which is very important.

The limits of liability typically apply per claim and in the aggregate. Some carriers offer split limits, while others do not.

The deductible or retention heading specifies how the deductible will apply, typically per claim or per wrongful act. Look for specific wording as to how the deductible will apply in case of multiple claims arising out of the same or related wrongful act to make sure there will not be multiple deductibles in such a case. That item may be negotiable.

The definitions section of the policy lists those words found in boldface type throughout the contract. While that section varies among carriers, most forms define the following terms: insured, claim, damages, claim expenses, insured services or professional services, bodily injury/property damage and personal injury/advertising injury, wrongful act, policy period, among others. Because the coverage trigger on those forms is a claim, the definition of “claim” is critical. The definition can vary from just a “demand” to a “verbal or written demand” or just a “written demand” — the latter being the most restrictive — for money or services including suits. Also, check to see whether two or more claims or suits arising out of the same, related or continuous professional services or wrongful acts will be considered a single claim. That is critical because the deductible on those policies typically applies per claim. All definitions are important, but “insured” and “claim” are priority.

Some policies contain what is called an awareness or discovery provision, which basically allows the insured to report, during the policy term, a circumstance he or she believes may turn out to be a claim in the future. If the circumstance turns out to be a claim, the carrier honors the date the circumstance was reported as the date the claim is made. That is a very important provision, and it is often a negotiable item if not automatically included in the policy form. Be sure to review the conditions in which a circumstance must be reported to the carrier.

The conditions section is normally at the end of the policy, and it deals with other insurance provisions, the application being material to the transaction, cancellation, changes, etc. The section usually includes the specific steps to be followed — or duties — when giving notice of claim or loss to the carrier.

Thoroughly review the exclusions section to make sure none of the professional services the insured needs covered is listed as an exclusion. Negotiate whenever needed.

Last but not least are the extended reporting period options. Some policies offer a basic premium-free ERP of 30 to 60 days. The premium-bearing ERP varies in length and cost, with some carriers offering only 12 months, to others offering 12-, 24-, 36- and 60-month options at different additional premiums in the way of a percentage of the total policy premium. It is important to determine in advance what such a percentage will be. The key to the ERP is to determine whether it is unilateral (one-way), meaning it is only available when the carrier cancels or non-renews, or bi-lateral (two-way), meaning it is available whether the carrier or the insured cancels or non-renews. That item is often negotiable.

Obviously, the bi-lateral option is more favorable to the insured. That provision is often referred to as a “tail,” and it is largely misunderstood or misinterpreted as an extension of coverage. The ERP is merely a period of time in which to report claims arising out of professional services/wrongful acts that took place during the policy period, that is, subsequent to the policy effective date or retroactive date, if any, and before the end of the policy period. The insured is not buying coverage. Rather, he or she is buying time. Take a moment to review the specifics about the number of days the insured has to request or elect the ERP.

The miscellaneous professional liability area is growing as new and unique services emerge. Consumers are becoming more sophisticated and routinely require evidence of professional liability in force prior to assigning a particular job or project. Most carriers’ minimum premiums for the class start at $2,500 for $1 million limit. The rating base is usually revenues, although interestingly enough, most policies are not auditable.

The underwriting process requires a completed application, current resumes on all professionals, brochures or a Web site address, and a sample copy of the contract/agreement for professional services used by the applicant. Policies apply to the applicant’s whole operation and not a particular project.

It’s worth reiterating that there are great differences among forms, so there’s no substitute to getting the specific form being quoted and reviewing it. As professionals, take the time to go over the forms with your clients. Whenever any item needs negotiation, approach your wholesaler or underwriter about it, and always document your file properly with your request and the response.

Rocio L. Orta is a professional liability underwriter with 20 years of experience. She heads the professional liability division at WSS-Pasadena and is a member of the PLUS Southern California Chapter Steering Committee. She authors the WSS Professional Liability monthly newsletter, “Professionally Speaking.”